The Lowdown: Two smoking memos and a dying dream

On Valentine's Day last year, Sherron Watkins stood in front of a Congressional Committee in Washington. There she told the story of how, six months before, she had come to send the first of two anonymous memos to the chairman of Enron, Ken Lay, detailing how a series of off-balance sheet deals were threatening to bring down America's fifth- largest corporation.

In those few months, the world had turned upside down for the feisty Texan finance expert. She had been persuaded to reveal her identity so she could tell Lay her concerns in person. He had failed to act, instead having her shifted to a less prominent post within the crumbling energy giant. "In retrospect," she admits, "my warning was too little too late."

Within a matter of weeks the business had gone bust and thousands of Watkins' colleagues lost their jobs. Yet she kept her $165,000 (£105,000) a year post and found herself lionised as a person of principle amid a den of thieves.

Now, in front of a committee of senators, she would be able to tell the truth about Enron. But to her surprise she found she would be testifying alongside Jeff Skilling, the former chief executive of the company, and Jeff McMahon, the former treasurer who was now running the group under US Chapter 11 bankruptcy rules.

"I was shell-shocked that Congress did that," Watkins recalls, her Southern accent rising in indignation. "It made it like a Jerry Springer show. It was like putting the witness to the bank robbery next to the bank robbers."

A year on she is still bitter about what happened at Enron, although ironically she has done incredibly well out of her employer's demise. Watkins was named one of three "persons of the year" by US magazine Time, along with Cynthia Cooper and Coleen Rowley, who also took brave stands to expose problems at their employers, telecoms giant WorldCom and the FBI respectively. "We're three ordinary people just doing our jobs," Watkins says modestly.

After leaving Enron last September, she embarked on a speaking tour of the US ("Enron has become the poster child for the abuse of power in corporate America") and is looking to build a career as a corporate governance consultant. And now she has written, with Texan investigative journalist Mimi Swartz, a book about the last days of Enron.*

The book is a rip-roaring affair, pulling no punches it names the guilty men and women. Two characters stand out as pure baddies – Andy Fastow, the chief financial officer who is now facing fraud charges in the US, and Skilling – while two others are singled out as people Watkins believed had principles but turned out to be terrible disappointments: Lay and McMahon. "The disappointing thing to me is the number of people who I thought were of high integrity but weren't and just got corrupted by the power and the money," says Watkins.

By the time she sent the famous memos, Watkins had been with Enron for eight years. She joined from Metall-Gesellschaft, the German metals trader which itself had been laid low by a trading scandal, and had trained at Arthur Andersen, Enron's auditor, whose role in the Enron affair brought its own demise.

Watkins had enjoyed a fairly glittering career at Enron. She had worked in various parts of the business, doing deals worth hundreds of millions of dollars, rolling with the punches delivered by the particularly vicious office politics and gaining a reputation as someone who could bring order from chaos.

By early 2001 she was working for Fastow. Many people in Enron knew about the off-balance sheet transactions and special purpose entities created by Fastow and his assistant, Michael Kopper. These deals served to flatter Enron's profits and bolster its balance sheet, while making millions for Fastow and his wife, Kopper and his partner, and a close circle of people and banks involved in the transactions, including our own NatWest.

The deals involved massive conflicts of interest, with the chief financial officer transferring lucrative deals to specially created companies in which he had a major shareholding. Yet it was only when Watkins moved into Fastow's team that she realised the full extent of the double dealing. A host of off-balance-sheet vehicles called "Raptors" were pushing Enron's liabilities out of the picture, but the deals were set to unwind in 2003.

Watkins could not believe that Fastow had created all this without getting an OK from Skilling, who had in effect run Enron for years, though he became chief executive only in early 2001. "Andy was the sort of guy who defined right and wrong by what he had permission to do," says Watkins. "Give him enough rope and he'd hang the company."

She had thought it pointless to raise her concerns with either Skilling or Fastow, and anyway in mid-August 2001 Skilling abruptly resigned. Suddenly a company that was supposedly breaking the mould of the energy industry was without its architect. "He [Skilling] is very charismatic. He has a magnetic personality and he talks in such a way that you feel you can do anything. I likened him to David Koresh," remembers Watkins, referring to the sect leader whose Branch Davidians held out for 51 days against a siege by US federal agents in Waco, Texas. "He had us all believing he would go boldly where no man had gone before. But then he set the building on fire and sneaked out the back door."

Watkins sent Lay two anonymous memos detailing her concerns about Fastow's transactions. Then, after much soul searching, she decided to reveal her identity so she could get an audience with him.

"I didn't think I was risking my job. I thought Ken Lay was a man of integrity and I was helping him. I thought the company would go bust in '03. It would be totally unfair. Skilling would say, 'I left in '01 and I knew nothing about this.' "

But the meeting was a disappointment. Lay appeared not to want to understand the problems Fastow had created, only becoming interested when he realised that one of the beneficiaries of the transactions was the gay lover of Kopper. Lay brought in McMahon to assess Watkins' concerns. "Ken said, 'Could Sherron be right?' and Jeff answered, 'Don't ask me.' "

This was a double blow for Watkins. McMahon was not only one of the most senior people at Enron but her best and oldest friend at the company. They had worked together at Arthur Andersen. She had flown to London for his wedding and he had been to hers.

But worse was to come. When Enron went into Chapter 11 bankruptcy, Mc-Mahon was appointed chief executive. He approved the payment of $55m in "retention bonuses" to senior people, including $1.5m to himself, while sacking 4,500 staff three weeks before Christmas with a payoff of just $4,000 each. "Isn't that just as bad as stealing?" argues Watkins. "It's putting your hand in the cash till."

She spent 20 years climbing the corporate ladder. She worked ridiculous hours, put relationships at risk, rushed back to the office after suffering a miscarriage and bought into the American dream that if you worked hard enough, you deserved the rewards. But the demise of Enron has shattered all of this. "It is very hard to know where you have an ethical company and where you don't."

Watkins argues that investors cannot trust the people who run corporations to behave in anyone's interest but their own. This situation is fed by the huge rewards given by US corporations to their executives through share options. "If you have outrageous stock option schemes that pay off in a couple of years, that will be all they work to. The pressure is on to make the biggest return in the shortest time and to heck with the future."

Ultimately, Watkins argues, the Enron affair was a failure of the checks and balances that should have kept the bad guys from causing too much harm. "Every single person who was supposed to be there to protect investors' interests – the board, the auditors, the advisers, the analysts, even the financial press – let them down."

*'Power Failure: The Rise & Fall of Enron' is published by Aurum Press at £14.99.

The Thing Is: ICI

ICI is not a sexy company but it makes some sexy products, like Armani's Mania for Men and Jennifer Lopez's perfume, Glow.

Better known for things like fertilisers, since 1997 ICI has been transforming itself from dull chemical manufacturer into a maker of "specialist" products and paints. And the makeover is now complete, according to the recently published annual report entitled "Brighter, fresher, sweeter, smoother".

But these boasts already look slightly out of date. Last week ICI had to admit to problems at two of its new, sexy subsidiaries – a revelation that prompted a share price slide of 39 per cent over the week, the worst performance in the FTSE 100. The market was unhappy because exactly a year ago ICI put its cap out to shareholders for £800m to cut its debt. Investors had thought its problems were over. But the transformation from dull to dazzling has not gone to plan.

Over the past five years ICI has gradually sold off its polyester, fertilisers, petrochemicals and catalysts businesses, raising £7bn. It has used the funds to buy more exciting "speciality" companies from Unilever for £5bn.

Now its products are varied: vegetable-based ingredients for skin cream; coconut and palm kernel oil; printing inks and resins; and paints like Dulux and DIY essentials like Polyfilla.

But ICI has a problem subsidiary in National Starch, whose adhesive and hairspray products were hit earlier this year by a rise in the cost of raw materials, causing profits to slump in the first quarter.

However, analysts could have forgiven ICI for this.

It is the problems at another subsidiary that have concerned investors more. Quest makes fragrances for perfumes like Glow and flavours for the food industry. Supply-chain problems at Quest in the Netherlands last year were not resolved and European customers were not serviced quickly. They voted with their feet and sales will be down 20 per cent in the first quarter. The manager has been replaced, but shareholders are worried that the exodus of customers could continue.

There is one very bad precedent for such changes. Marconi was once a great industrial engineering power that Britain could be proud of. But it was decided that this was a little too boring, and that telecoms equipment was the way forward. A fatal mistake.

A few years on and now Marconi's shares are almost worthless, the company is bulging with debts and it is not too far away from collapsing completely.

The similarity of the two tales prompted last week's Economist magazine to ask whether ICI will be "Marconi, mark II?"

Events at ICI are not serious enough to bear out this comparison. But reports last week that shareholders want the deeply unsexy chief executive Brendan O'Neill to leave are a sign that they are asking the same question.

Heather Tomlinson